Last Wednesday, June 7, 2017, Dr. Ricardo Hausmann, Director of the Center for International Development and Professor of the Practice of Economic Development at Harvard University participated as keynote speaker at the Rafael del Pino Foundation in Madrid, Spain. His presentation, entitled, “Us and Prosperity” analyzed the relation between economic development and the sense of identity, the belonging to a group, community or society.

Dr. Hausmann opened his speech by asking what makes countries rich or poor, a question that has been asked since Adam Smith’s publication of “The Wealth of Nations” in 1776. Back then, the richest country in the world was the Netherlands with an income per-capita four times higher than the poorest countries. But what used to beva problem of a scale of 4 to 1, has now become a problem of 256 to 1.

The reason behind this issue is that income per-capita has a particular behavior throughout time. It has remained stagnant over history, and only started to increase in the last 20 years. Its graphic representation would look like a hockey stick, with the last two centuries forming the base of the “J”. Acemoglu and Robinson, explained in “Why Nations Fail” that the difference between rich and poor countries is found on the quality of their institutions. However, when we observe countries such as Mexico, we see that there is a significant difference of income within its states despite being under the same economic, political, judicial system, etc. Therefore one can conclude that there must be another explanation to this matter.

The answer can be found in technology, or in other words, in the combination of assets and protocols that comes with know-how or from people who work with technology. It is necessary to complement technology with know-how, because without it, it is almost nothing. Nevertheless, this know-how is difficult to move. The assets can be transported from one country to another, from a rich country to a poor one. The protocols can be available for the whole world if they are uploaded on the internet. However, we cannot do this with know-how, fundamentally because modern technology needs teams formed by people that hold different know-how to collaborate in the production. Hence the challenge is to move know-how, not individuals but teams. A society has more know-how the moment they know how to do more things and when people are specialized. As individuals have different knowledge, which varies from one person to another, the society as a whole knows more.

Modern organizations mobilize a big quantity of knowledge to function. Products are like words: you can produce them by putting together know-how the same way as words are built by connecting several letters. As diversity of know-how increases in a system, not only the quantity of different products that can be built rises, but there is also an increase of complex products that are more challenging to build. This can be measured with the Index of Economic Complexity. The countries with a low index tend to be poor, while those that have a higher index tend to be rich.

We need to solve the coordination problems in order to solve the problem of knowledge diffusion. Know-how moves from company to company, but in order to move it they need to move people. The problem is that the developing countries have been very close-minded in terms of immigration and they have imposed significant restrictions to hire foreigners, which hinders the movement of Know-how. The reason for this is that foreign presence would violate the collective identity feeling, belonging to a group or community, and therefore this feeling becomes an obstacle to the possibilities of economic development.